Friday, June 14, 2019

DoD Removes "Reasonable Expectation" Rule from Adequate Price Competition

The FAR (Federal Acquisition Regulation) has been amended to eliminate the so-called "Reasonable Expectation" rule when it comes to awarding contracts based on adequate price competition for DoD, NASA, and the Coast Guard procurements.

The Reasonable Expectation rule provided that a price is based on adequate price competition when there was a reasonable expectation, based on market research or other assessment, that two or more responsible offerors, competing independently, would submit priced offers in response to the solicitation's expressed requirement, even though only one offer is received from a responsible offeror. There's more to the rule but that covers the essence of it. Agencies other than DoD, NASA, and the Coast Guard can still use the "reasonable expectation" rule in awarding contracts based on price competition.

This tightening of the adequate price competition rules was brought about by the FY 2017 National Defense Authorization Act. Evidently, Congress had some concerns over the potential abuse of the reasonable expectation rule and took action to eliminate it - at least for DoD, NASA, and the Coast Guard. Our limited research did not uncover any anecdotal evidence of abuse of the reasonable expectation rule. In fact, one commentator writing in response to the rule after it was first proposed stated that it was unclear what problem this rule was trying to resolve. The respondent urged reconsideration of the regulation until the actual problem can be identified and targeted with an expected outcome that proves an acceptable solution.

The Defense Department is working on a rule to implement this at the subcontractor level.



Thursday, June 13, 2019

DoD Proposes to Double the CPSR Threshold

The Defense Department has issued a proposed rule to increase the CPSR (Contractor Purchasing System Review) threshold from $25 million to $50 million in sales to the Government.

Currently, there are about 670 defense contractors that are subject to DCMA's (Defense Contract Management Agency) CPSR reviews (at least) once every three years. Increasing the threshold from $25 million to $50 million will reduce that number by 20 percent or 133 contractors.

The Defense Department maintains that the $25 million threshold has not been increased since 1996 and by doubling it now, roughly equates to inflation over that same time period. Under the proposed rule, contracting officers will retain the flexibility to lower that threshold if determined to be in the best interest of the Government.

The proposed rule will certainly reduce the burden on small contractors and, according to DCMA, will allow a more efficient and effective use of CPSR resources at larger contractors where more taxpayer dollars are at risk. Larger contractors, we're certain, are thrilled at the prospect of additional oversight. We guess that its too much to expect that if DCMA's work goes down by 20 percent that there would be a commensurate reduction in DCMA staffing.

There is one downside for small contractors. There could be additional requirements for those firms to request consent to contract from ACOs (see FAR 52.244-2, Subcontracts). With approved purchasing systems, the consent to subcontract requirement does not apply.

Wednesday, June 12, 2019

Recommendations to Prevent Overcharging by Sole-Source Contractors

For the past two days, we have been discussing the TransDigm case where the DoD contractor significantly overcharged the Government for spare parts. Parts 1 and 2 can be accessed here and here, respectively.

To recap, the House Committee on Oversight and Reform requested the Defense Department OIG (Office of Inspector General) to look into concerns brought to their attention concerning potential overcharging by TransDigm. The OIG pulled a sample of contracts and determined that 46 of 47 contracts were overpriced by $16 million. Ultimately, TransDigm paid back the $16 million but now, the House Committee has requested the OIG to perform a comprehensive review of all TransDigm contracts with the DoD.

The OIG pointed out a number of regulations that contributed to the overcharging including the fact that contracting officers had no recourse when contractors refuse to provide requested cost or pricing data needed to determine price reasonableness. The OIG also made a number of recommendations to avoid future occurrences including the following:

  1. Examine the US Code, FAR, DFARS, and other guidance to determine changes needed in the acquisition process of parts produced or provided from a sole-source to ensure that contracting officers obtain uncertified cost data when requested and that the DoD receives full and fair value for its expenditures.
  2. Immediately revise the policy on access to records to expand reporting requirements to all contractor denial of cost data for acquisitions of parts produced by one manufacturer, as well as for other sole-source acquisitions, regardless of whether the requirement is urgent. Disseminate the new guidance and update the DFARS as appropriate.
  3. Establish a team of functional experts to analyze data reported. The team should assess parts and contractors deemed to be at high risk for unreasonable pricing and identify trends and perform price analysis and cost analysis of high-risk parts to identify lower cost alternatives or fair and reasonable pricing for future procurements.

DoD's response was fairly non-committal. DoD essentially stated that it would look into the matter but didn't address specifics of when and how the recommendations would be implemented. Therefore, from the OIG's perspective, the recommendations remain unresolved.

Tuesday, June 11, 2019

TransDigm - How Overcharging Was Allowed to Occur

Yesterday we discussed the House Committee on Oversight and Reform's role in securing a $16 million return of excess profits by TransDigm on its DoD contracts. Today we want to take a closer look at the DoD Office of Inspector General's (OIG's) audit report that disclosed the overcharging to see how existing regulations allowed the overcharges to occur. If  you missed yesterday's installment, you can access it here.

The OIG determined that TransDigm earned excess profit on 46 of 47 parts purchased by the Defense Department even though contracting officers followed the FAR (Federal Acquisition Regulations) and DFARS (DoD FAR Supplement) when they determined that prices were fair and reasonable. How does that happen? Under what circumstances does FAR allow profit margins up to 4,451 percent (that percentage is not a typo - TransDigm really earned profit of 4,451 percent on one of the purchases. On average, profit on the 46 parts was more than 100 percent.


Contracting officers used FAR and DFARS-allowed pricing methods, including historical price analysis, competition, and cost analysis to determine whether prices were fair and reasonable. The OIG however concluded that historical price analysis and competition were unreliable in identifying when TransDigm was charging excess profit because,

  • prices for parts had become inflated over time, and some parts appeared to be inflated at the time the Government first purchased the part, further compounding the excess profits and
  • TransDigm was the only manufacturer at the time for the majority of the parts competitively awarded, giving TransDigm the opportunity to set the market price for those parts because the other competitors planned to buy the parts from TransDigm before selling them to the Government.
 According to the OIG, performing cost analysis using certified or uncertified cost data is the most reliable way to determine whether a price is fair and reasonable. Contracting officers are required to obtain certified cost data before awarding contracts above the TINA threshold and can request uncertified cost data for those below the threshold. However, contracting officers are often prevented from obtaining uncertified cost data because of the following reasons:
  • FAR enables sole-source providers and manufacturers of spare parts to avoid providing uncertified cost data, even when requested, because of the less stringent requirements for awarding small dollar value contracts and commercial item contracts.
  • There is no specific requirement in FAR that requires or compels contractors to provide certified or uncertified cost data to the contracting officer when requested before the contract is awarded
  • Statutory and regulatory requirements discourage contracting officers from asking for uncertified cost data when determining whether a price is fair and reasonable.

In many of the contracts awarded to TransDigm, contracting officers justified the price as 'the best obtainable price' because TransDigm refused to submit cost or pricing data and the contracting officers had exhausted other methods of determining price reasonableness and the need was urgent.

Tomorrow we will look at the OIG's recommendations for preventing future occurrences of price gouging.


Monday, June 10, 2019

Congress Calls for Comprehensive Audit of Contractor's Sales to Defense Department

Background. Last February, the Defense Department's Office of Inspector General (OIG) issued a report on its audit of purchases from TransDigm Group. The audit was conducted in response to several letters from Congress to determine whether purchases were made at fair and reasonable prices.

The OIG reviewed a small sample of 47 parts totaling $29.7 million purchased by DoD from TransDigm between January 2015 and January 2017. Specifically, the OIG set out to determine how contracting officers established fair and reasonable prices for the required parts.

As a result of the audit, the OIG concluded that TransDigm had overcharged the Government by $16.1 million beyond a reasonable profit. That works out to a figure greater than 100 percent profit.
How does a contracting officer determine that prices were fair and reasonable when at those exorbitant rates? There were a number of factors that left contracting officers hamstrung in the process, the most prevalent being denial of access to cost or pricing data. The Defense Department needed critical parts and TransDigm pretty much gave the Defense Department a 'take it or leave it' offer. In fact, of the 47 contracts audited by the OIG, 46 were overpriced and TransDigm denied the Government access to cost or pricing data. The only one of the 47 contracts not overpriced was one in which TransDigm was required to furnish cost or pricing data because the value exceeded the threshold for cost or pricing data requirement. The OIG report has many more details concerning problems that contracting officers faced.

New Development. Late last month (May 24th), the House Committee on Oversight and Reform announced that TransDigm had agreed to refund the $16 million in overcharges.
Today's decision by TransDigm to refund millions of dollars in blatant overcharges would not have happened without the hearing in the Oversight Committee last week. This is solid, bread-and-butter oversight that helps our troops and the American taxpayers. We saved more money today for th American people than our Committee's entire budget for the year. ... While this is a good first step, we must do even more in the future to prevent unscrupulous contractors from holding us hostage through abusive monopoly contracts.
TransDigm's problems did not end with the $16 million repayment. The House Committee on Oversight and Reform has now requested the OIG to perform a comprehensive audit of all TransDigm's contracts from January 2015. These contracts totaled $782 million and if overstated by the same percentage that the OIG's found in its initial sample, would return an additional $350 million to the Treasury.


Friday, June 7, 2019

Legislation to Help Small Business Subcontractors Get Paid On Time

Subcontractors to Government contractors are often vulnerable to the whims and idiosyncrasies of those prime contractors. We know of cases and have heard many anecdotes where primes do not pay their subcontractors for work performed on a timely basis. Sometimes prime contractors, contrary to procurement regulations, do not pay their subcontractors until they themselves have been reimbursed by the Government. For small business subcontractors, delayed payments can put severe strains on their finances, cash flow, and profitability.

Help may be on the way.

Each Federal agency has an Office of Small and Disadvantaged Business Utilization (OSDBU) whose purpose is to provide "maximum practicable opportunities" to small business concerns when acquiring goods and services. Most agencies use the OSDBU name so they're easy to find when searching a particular agency. In the Defense Department, the organization is referred to as the "Office of Small Business Programs".

Earlier this year, legislation was introduced in the House (and has already passed the House vote) that would lend assistance to small business subcontractors who are not being paid by their Government prime contractors in a timely manner. This bill utilizes the services of OSDBUs to assist small businesses in receiving timely payments from their prime contractors.

Here is how it will work.

1. If a subcontractor has not received payment for performance within 30 days of the completion of such performance, it has 15 days to notify (i) the Office of Small and Disadvantaged Business Utilization (OSDBU) of the Federal agency and (ii) the prime contractor of such lack of payment.

2. After receiving the notification, the OSDBU must investigate. The OSDBU will verify the subcontractor's contention that payment has not occurred and importantly, determine whether non-payment is the result of a restriction placed on the prime contractor by the Federal agency.

3. During the investigatory period, the prime contractor may respond to both the subcontractor and the OSDBU with relevant verifying documentation to either (i) prove payment or (ii) allowable status of nonpayment (i.e. the Government imposed a restriction on the Prime contract/contractor).

4. If the OSDBU verifies the lack of payment and determines that it was not due to an action of the Federal agency, the OSDBU will notify the prime contract and give them 15 days to make payment.

5. If the prime contractor does not make full payment in 15 days, the OSDBU shall ensure that such failure to pay is reflected in the CPARS (Contractor Performance Assessment Reporting System).

Will this work? Perhaps. No Government contractor wants to have negative comments attributed to them in the CPAR system.

Thursday, June 6, 2019

GAO's Listing of Fraud Risk Indicators

Trial lawyers have an old saying: "You never ask a question on cross examination to which you do not know the answer to." Unlike lawyers, contract auditors, during the fieldwork phase of an audit, ask a lot of questions to which they don't know the answer. Its what auditors do and its part of gathering sufficient information to support a conclusion. However, many auditors will also sprinkle a few questions into the mix that they do know the answer to. They do this to test the veracity and forthrightness of the individual being interviewed (or questioned).

During the planning stage of any audit, auditors are required by Generally Accepted Government Auditing Standards (GAGAS) to consider fraud risk factors and if any are noted, to add specific audit procedures to address the increased risk of noncompliances or inappropriate costs charged to the Government. For DCAA (Defense Contract Audit Agency), auditors are directed to two sources of fraud risk indicators. One is the listing published by the Defense Department's Office of Inspector General (OIG) and the other is the Government Auditing Standards published by the Government Accountability Office (GAO).

We've written concerning the OIG's fraud risk indicators several times on these pages. For example, see Fraud Indicators and What are Fraud Indicators. Today we want to list out the GAO's fraud indicators. In general, the GAO's fraud indicators are more conceptual in nature while the OIG's are much more granular. The GAO would ask: "Is there something going on in the U.S. economy that threatens the company's viability? The OIG on the other hand might list out fraud risk indicators for a specific cost element, such as Consultant and Professional Service costs.

Here then are the 14 fraud risk indicators published by the GAO.

  1. Economic, programmatic, or entity operating conditions threaten the entity's financial stability, viability, or budget
  2. The nature of the entity's operations provide opportunities to engage in fraud.
  3. Management's monitoring of compliance with policies, laws, and regulations is inadequate
  4. The organizational structure is unstable or unnecessarily complex
  5. Communication and/or support for ethical standards by management is lacking.
  6. Management is willing to accept unusually high levels of risk in making significant decisions.
  7. The entity has a history of impropriety, such as previous issues with fraud, waste, abuse, or questionable practices, or past audits or investigations with findings of questionable or criminal activity.
  8. Operating policies and procedures have not been developed or are outdated.
  9. Key documentation is lacking or does not exist.
  10. Asset accountability or safeguarding procedures is lacking.
  11. Improper payments.
  12. False or misleading information.
  13. A pattern of large procurements in any budget line with remaining funds at year end, in order to "use up all of the funds available".
  14. Unusual patterns and trends in contracting, procurement, acquisition, and other activities of the entity or program.
There is one thing for certain that will result in increased contractor oversight; a history of proprieties. That's why risk factor No. 7 is present. There is another thing that will significantly increase an auditor's awareness; evasive answers and missing documentation. That is why risk factor No. 9 is present.


Wednesday, June 5, 2019

Contractor Pleaded Guilty in Product Substitution Case

The Justice Department recently announced a guilty plea by a company involved in product substitution. DLA (Defense Logistics Agency) put out a solicitation to purchase oil absorbent mats - mats that because they are used to absorb flammable liquids, are required to dissipate electrical charges to the ground. The solicitation stated that there were only two approved manufacturers for these types of mats, both located in Pennsylvania and required mats to be purchased from one of the two manufacturers.

Enco, a company in New Hampshire was one of the bidders for the mats, proposing to buy mats from one of the designated suppliers. Ultimately Enco won the award and between 2012 and 2013, sold 21 thousand mats to the Government and collected nearly $700 thousand.

There was a problem however. These mats that Enco was selling to the Government were not manufactured by one of the approved manufacturers. Someone raised suspicions and DLA brought in an independent company to test the mats for compliance. The testing company concluded that the mats did not meet the contract requirements.

Once Enco's scheme was uncovered, Enco wrote to DLA admitting that it did not purchase the mats from one of the two approved suppliers because their prices were prohibitive. When interviewed by Government investigators, Enco's president stated that at the time of award, the company had fully intended to purchase mats from one of the two approved manufacturers but after award, decided to seek out other sources. Here's what's interesting however. The investigator already had documents showing that even before contract award, Enco had already decided and committed to purchasing mats from a non-approved source so Enco's president was caught in a lie. That 'lie', according to the Justice Department press release, proved intent which is a crime.

Sentencing is scheduled for later this year. The company is most certainly already debarred from Government contracting and could also face significant fines.

Tuesday, June 4, 2019

Similar Proposals - One Was Considered Weak - the Other Was Considered Strong

The Air Force issued a solicitation for someone to collect, analyze, synthesize and process scientific and technical information at its Homeland Defense and Security Information Analysis Center (essentially a publicly accessible website) . Information International Associates, Inc (IIA) was one of several unsuccessful bidders IIA challenged the award. IIA claimed that the Air Force unreasonably evaluated awardee's proposal as containing a strength where the added benefit identified by the Air Force was not consistent with the terms of the solicitation while evaluating IIA's proposal as containing a weakness when it was not materially different than the awardee's proposal. (Well, as they say, one company's strength is another company's weakness.)

The solicitation required a feedback mechanism where viewers provide feedback on the website's content. The winning bidder (Quanterion) proposed a system that automatically sends an email requesting feedback at each download and also tracks and consolidates the status of the responses. That was rated a strength by the Air Force. The problem was, as the GAO noted, IIA proposed essentially the same mechanism and that was rated a weakness.

The GAO found that the Air Force unequally applied its stated rationale for why Quanterion satisfied the RFP's feedback requirement while IIA's did not. Both proposals included systems to track view counts - one was rated a strength and the other a weakness.

The GAO concluded that the Air Force unreasonably assigned this weakness to IIA's proposal and recommended that the Air Force conduct and document a new evaluation. The GAO also recommended that the Air Force reimburse IIA for reasonable costs associated with filing and pursuing its protest, including attorney fees.


Monday, June 3, 2019

Proposed Legislation to Strengthen DoD Ethics Policies

The following was extracted from a press release announcing a new bill that was introduced in the Senate - The Department of Defense Ethics and Anti-Corruption Act.

In announcing her proposed legislation, Senator Warren wrote:
Defense contractors often recruit former DoD officials through the revolving door to become lobbyists, then use those former officials' relationships and access to peddle influence at the Pentagon and to secure lucrative defense contracts. According to the Project on Government Oversight's Center for Defense Information, in 2018, nearly 400 high-ranking DoD officials and military officers took a spin through the revolving door to become lobbyists, board members, executives, or consultants for defense contractors. Of these former DoD officials, including top brass in the U.S. military, one in four went to work for one of the DoD's top five contractors.
The proposed DoD Ethics and Anti-Corruption Act would:

  • Limit the revolving door and restrict contractor influence by imposing a four-year ban on "giant" contractors hiring senior DoD officials and on contractors hiring former DoD employees who managed their contract.
  • Extend to four years the existing prohibition on former military generals lobbying the DoD
  • Require defense contractors to submit detailed annual reports to DoD regarding former senior DoD officials who are subsequently employed by contracts
  • Raise the recusal standard for DoD employees by prohibiting them from participating in any matter that affects the financial interests of their former employer for four years
  • Ban senior DoD officials from owning any stock in a major defense contractor and bans all DoD employees from owning any stock in contractors if the employee can use their official position to influence the stock's value.
Additionally, the 'Act' would require large defense contractors to submit a report of their lobbying activities including who they meet with and what they're lobbying about, and to make that information public.

A companion bill will also be introduced in the House.




Friday, May 31, 2019

Contractor Debarred Over $5 Thousand Dispute

The Department of Labor's Wage and Hour Division (WHD) performs routine (usually random) audits of Government contractor compliance with the Davis-Bacon and Service Contracting Acts and performs investigations when warranted such as those from whistleblowers. We've discussed the results of a few of those audits/investigations on these pages. Usually, when violations are discovered, contractors pay employees the shortages and life goes on. Companies that have been found to be in non-compliance however, are placed in a higher risk category where their chances of being audited more frequently, increase.

One recent WHD investigation found that a contractor filed to pay a total of $4,715 in back wages to eleven employees. As a result, the Labor Department "debarred' the contractor which means no further Government contracts for three years. That, to us, seemed a bit extreme - getting debarred over less than five thousand dollar noncompliance. There must be more to this story we surmised.

There was. The contractor, Pro-Fit Development Inc., was a repeat offender. The company had been found to be in violation of prevailing wage obligations back in 2017. A follow-up "visit" by the WHD found that the company had continued to short-pay its employees. Not only that, but Pro-Fit also failed to notify its subcontractors of their prevailing wage responsibilities, causing its subcontractors to pay their employees at rates lower than those that corresponded to the work they actually performed.

After Pro-Fit refused to pay back the $5 thousand to affected employees, WHD requested the contracting authority to Withhold funds due to the contractor under the contract. Those withheld funds will instead, be transferred to the employees who are owed back wages.

Thursday, May 30, 2019

What is Contract Audit Followup - (CAFU) - Part 3?

This is the third and final posting on DoD's CAFU (Contract Audit Follow-Up) system. If you missed either of the first two segments, go to Part 1 and Part 2.

The Contract Audit Follow-Up system was established to ensure that the contracting officer had all pertinent evidential materials to assist in resolving the issues, that the resolution was documented and, in certain cases, approved by higher management, and that audit findings were timely acted upon so that the findings didn't become 'stale' or the audit report was misplaced or buried.

Reportable audits, as we discussed yesterday, are those with significant or material findings. After an audit report is 'reported' under the CAFU system, there are specific deadlines a contracting officer must adhere to. For reportable audits, there are two key milestone dates; resolution and disposition. The simplest way to think about this is to compare them with forward pricing activities. The resolution date corresponds to the pre-negotiation objective while the disposition date corresponds to the post-negotiation memorandum (PNM). Contracting officers have six months to "resolve" the issue and twelve months to "dispose" of the issue (unless there are other mitigating circumstances, of course).

The DoD Instruction on CAFUs, requires that dispositions of all reportable findings and recommendations must be documented in a signed and dated post-negotiation memorandum. The documentation must itemize each audit finding and recommendation, indicate whether the finding and/or recommendation is agree to, and if not, document the rational for the disagreement. If the reported findings or recommendations are based on interpretation of law or regulation, the contracting officer is required to consult with legal counsel.

So why should contractors be concerned about this internal DoD reporting mechanism? There are several reasons.

  1. Extends the resolution process. If a contractor and auditor cannot reach an agreement on whatever issue is at stake, the resolution process is kicked upstairs to the contracting officer to resolve. This will add a minimum of six to twelve months before resolution.
  2. Glib talk may not work. It used to be that where there was an impasse between contractor and auditor, contractors would opt to take the issue up with the contracting officer figuring that the contracting officer might be more reasonable since he/she has not been so heavily invested in the issue. Under the CAFU system, that strategy doesn't work as well as it once did because now the contracting officer must address each issue individually and specifically and document and seek approval if his/her decision is contrary to the audit findings.
  3. Cost money. If the issue involves the allowability of incurred costs, the Government is going to keep the money until there is a resolution. This means that regardless of the outcome, there will be imputed interest on the amount withheld. For contractors borrowing working capital, this is a very real cost.
Sometimes auditors are (or can seem to be) unreasonable so there is no option other than taking the issue to the contracting officer. Our experience however is that resolution of audit issues is usually much quicker if resolved at the auditor level.

Wednesday, May 29, 2019

What is Contract Audit Follow-Up (CAFU) - Part 2?

Yesterday we began a short series on the CAFU (Contract Audit Follow-Up) System with a description of what the system does and the authority by which it was established. If you missed Part 1, read it here.

Contract audit reports, those issued by DCAA (Defense Contract Audit Agency), and to a lesser extent by the OIG (DoD Office of Inspector General) often deal with significant problems or controversial situations. At times, differences of opinion between the auditor and the contracting officer may arise during the settlement of such audit issues.

The Contract Audit Follow-Up system was established to ensure that the contracting officer had all pertinent evidential materials to assist in resolving the issues, that the resolution was documented and, in certain cases, approved by higher management, and that audit findings were timely acted upon so that the findings didn't become 'stale' or the audit report was misplaced or buried.

The governing document, DoD Instruction 7640.02 lists nine types of audit reports that are subject to CAFU tracking (ten, if you count the category called 'other'). The list includes:

  • Business system audits
  • Claims and equitable adjustments
  • Defective pricing
  • Cost accounting standards (non compliance with cost accounting standards, adequacy of CAS disclosure statements, and cost impact statements)
  • Operations audits (those reports dealing with efficiency, effectiveness, and economy of operations)
  • Incurred cost audits and settlement of final rates
  • Preaward accounting system reviews.
  • Contract terminations
  • Earned Value Management Systems (EVMS)

Notice what is not included in this list:

  • Audits of forward pricing proposal
  • Forward pricing indirect rates
  • Provisional billing rates

For an audit to be reported under the CAFU system, the report must contain material (i.e. significant) findings. There is a certain amount of judgment involved in determining whether a finding is significant but in today's environment, any reported finding is by definition, significant.

Tomorrow, in Part 3, we will include some final thoughts on DoD's CAFU system.




Tuesday, May 28, 2019

What is Contract Audit Follow-up (CAFU) - Part 1?

The Contract Audit Follow-up System or CAFU  (pronounced 'ka fu'), is a Defense Department tracking system, administered by the Department's Office of Inspector General (OIG) to monitor the resolution of contract audit reports (usually those issued by DCAA but also those issued by Independent Public Accountants (IPAs) hired by DoD to conduct contract audits.

Contract auditors perform audits, write reports, and send them to the contracting officer to resolve whatever findings have been reported. Contractors may think that the Government's position is a unified position but that is rarely the case. Contract auditors tend to be more aggressive in challenging costs or reporting on internal control deficiencies or recommending more efficient ways of doing things than are contracting officers though we can think of a few exceptions where contracting officers have taken more aggressive positions than contract auditors.

When contracting officers do not sustain audit findings, auditors tend to get upset. Back before the CAFU system was initiated (mid-80s, we believe), contracting officers were able to, and often did, dispense with audit findings with nary a thought to justifying their rationale. After all, they were the contracting officers and they made the final decisions.

The DoD OIG was probably the most instrumental in bringing changes to the wild west of audit finding resolutions. The OIG looked at audit reports and traced them to negotiation and resolution and found that often times, there was no documentation or the documentation was not sufficient to ascertain whether the 'right' decision had been made. Additionally, the OIG found that in many cases, audit reports 'slipped through the cracks' so that there was never a resolution - the reports just died.

The Contract Audit Follow-Up (CAFU) system (see DoD Instruction 7640.02) was designed to serve two purposes. First, it required that audits be tracked to ensure that none fall though the cracks any longer. DCAA (Defense Contract Audit Agency) is the Agency responsible for identifying reportable audit reports. Second, the CAFU system put some accountability back into contracting officer decisions when those decisions run counter to the audit report recommendations.

Tomorrow we will discuss the types of audit reports that are reportable under the CAFU system and why contractors should care.

Friday, May 24, 2019

Falsified Inspection Reports Leads to Company's Demise

What can happen because of forged signatures? Well, it can cause a company to fail and 35 employees to lose their jobs, for one. If the forgeries involved inspections of high-tolerance machining for flight critical aerospace parts used to build space flight vehicles, the outcome could be much more catastrophic.

The Justice Department announced charges against a quality assurance engineer at PMI Industries in Rochester New York for falsifying inspection reports for those kinds of parts. The company had contracts with SpaceX and other Defense Department aerospace contractors including SpaceX's Falcon launch vehicle family and the Dragon spacecraft family. Falcon and Dragon both deliver payloads into earth orbit for NASA, Air Force and other Governmental agencies.

In January 2018, SpaceX asked SQA Services Inc to perform an internal audit of PMI's quality control program. SQA is a company that specializes in quality assurance functions throughout the aerospace and other industries. The SQA audit revealed that PMI had falsified multiple source inspection reports and non-destructive testing (NDT) certifications on flight-critical parts. Source inspections and NDTs are key tools used in the aerospace industry to ensure manufactured parts comply with quality and safety standards. Specifically, SQA found that the signed source inspection reports had forged signatures of the SQA inspector.

One thing led to another, NASA was advised and its Inspector General opened an investigation. Ultimately, the OIG found 38 falsified source inspection reports and 76 individual piece parts that were rejected during source inspection but shipped to SpaceX nevertheless.

SpaceX terminated its contract with PMI which had to close its doors laying off 35 employees in the process. The quality assurance engineer is facing up to 10 years in prison and a $250,000 fine (though undoubtedly, actual punishment will be much lighter).

When one of the engineer's bosses asked him why he did it, the engineer replied that he just "wanted to ship more product for the company".

The full Justice Department press release on this case can be accessed here.


Thursday, May 23, 2019

Inspector General Finds Billing Irregularities at EPA

The Office of Inspector General (OIG) for the Environmental Protection Agency (EPA) received a hotline complaint regarding possible irregularities with contract invoicing and payments on a particular contract that provided EPA with a broad range of information technology and information management technical and professional services (Task Order 12). This was a large cost plus fixed fee task order that grew from $100 million to over $1.2 billion by the time it ended in 2017.

 As a result of the hotline tip, the OIG conducted an audit to determine whether Task Order 12 had effective controls over billing and funding to prevent fraud, waste and abuse. The audit found a number of deficiencies including:

  • Required contractor performance reports were not finalized
  • There were no official contract or task order modifications for some of the Contracting Officer (CO) and Contracting Officer Representative (COR) changes
  • COR appointment memorandums were missing
  • COs did not perform required periodic invoice reviews.
The last cited deficiency, failure to perform invoice reviews, gets the most attention and has the highest potential for overbilling the Government. FAR and EPA regulations require that invoices be thoroughly reviewed prior to payment. Despite this requirement, there was not documentation to show that invoices were adequately reviewed prior to payment. As a result, the OIG concluded that EPA did not have reasonable assurance that costs or fee billed under Task Order 12 were allowable, allocable and reasonable. In fact, in its limited sampling, the OIG found more than $5 million in overbilling. Some of the overbilling issues would have been caught had EPA done its required invoice reviews such as where fee was billed at eight percent when the contract limited fee to six percent.

The OIG made seven obvious recommendations (e.g. do a better job, follow regulations, etc) to which the EPA concurred (obviously). The full OIG audit report is available here.

Wednesday, May 22, 2019

OFPP Proposals for the Fiscal Year 2020 NDAA

The Office of Procurement Policy (OFPP) was established by Congress in 1974 to provide overall direction for government-wide procurement policies, regulations and procedures and to promote economy, efficiency, and effectiveness in acquisition processes. Where ten percent of every dollar spent by the Government going to contractors, it is imperative that contract actions result in the best value for the taxpayer. The CAS Board (Cost Accounting Standards) board resides within the OFPP and OFPP's Administrator (currently Lesley Field) acts as the Board's Chair.

Recently, the OFPP sent six recommendations to Congress for the FY2020 NDAA (National Defense Authorization Act). The stated intent of these recommendations is to streamline and improve the agility and efficiency of the federal acquisition process. These recommendations include:

  1. Establish an "Acquisition Modernization Test Board to accelerate work on a "contemporary acquisition state through testing, feedback, re-testing, and scaling of ideas that have been show to work". The proposal would authorize the OFPP's Administrator to exercise a waiver of one or more acquisition or procurement laws as part of a pilot program to evaluate how changing the statutory requirement(s) might facilitate more efficient achievement of the purpose underlying the law. We can thing of a few statutes that, if waived, would save the Government significant amounts of money; the Davis-Bacon Act and the Service Contracting Act.
  2. Disestablish the Defense Cost accounting Board. We've written several times about the DCASB (Defense Cost Accounting Standards Board). See, for example, Will the Newly Created Defense CAS Board Survive? Its creation was most a result of inaction by the CAS Board. The OFPP believes that the Defense CAS Board will create a more complicated regulatory framework for cost accounting standards.
  3. Increase the applicability of CAS from $2 million to $15 million. This would, of course, reduce the number of contractors required to comply with CAS Standards.
  4. Increase the micro-purchase threshold from $3,000 to $10,000. Basically this would allow Government credit card holders to use their cards for purchases up to $10 thousand.
  5. Increase the task and delivery order protest threshold for civilian agencies from $10 million to match the Defense agency threshold of $25 million.
  6. Remove the requirement for federal contractors to estimate the percentage of the total recovered material content for EPA designated items delivered and/or used in contract performance and submit certified reports to the contracting officer.

These recommendations may very well appear in the NDAA markups now working their way through Congress. The recommendation giving the OFPP Administrator the authority to waive Statutory requirements (on a test basis) may not receive great reception as it might be viewed as giving too much authority to OFPP.

Tuesday, May 21, 2019

Contractor Pays $200 Thousand in Back Wages for Failing to Pay Prevailing Wages

The Department of Labor's Wage and Hour Division (WHD) announced late last week that a Government contractor violated the Fair Labor Standards Act (FLSA) and the Service Contract Act (SCA) and has agreed to pay nearly $200 thousand in wages and fringe benefits to twenty-two of its current and former employees.

The contractor, Day & Zimmerman Federal Services holds contracts for IT (Information Technology) services at two Marine Corps installations. Their contracts required them to pay prevailing wages for the skill sets required by the contracts. As a result of WHD's investigation, Day & Zimmerman was found to have misclassified those 22 employees resulting in the company paying less than prevailing wage.

As a result of failing to pay prevailing wages, Day & Zimmerman also short-changed these employees their overtime entitlements. And finally, WHD also charged Day & Zimmerman with failing to keep accurate records reflecting the required SCA wage rates and correct work classifications.

The WHD was hardly sympathetic to what appears to have been a misunderstanding or unintentional oversight by Day & Zimmerman. WHD stated that it is the contractor's responsibility to ensure compliance with all the statutes, rules and regulations applying to Government contractors.

The WHD offers quite a number of compliance tools. These can be accessed at www.dol.gov/whd/.

Monday, May 20, 2019

DCAA Updates Its Guidance on Identifying Expressly Unallowable Costs

DCAA (Defense Contract Audit Agency) has updated its audit guidance for identifying expressly unallowable costs. This update comes as a result of recent court cases and wording changes to the FAR (Federal Acquisition Regulations) and DFARS (DoD FAR Supplement).

The issue of expressly unallowable costs is significant because such costs are subject to a penalty if found by an auditor in an incurred cost claim or any other billing to the Government. It has also been controversial because contract auditors often clash as to whether a particular cost is expressly unallowable. DCAA's position historically has been that even if the cost principle does not include the word "unallowable" or the phrase "not allowable" does not mean that costs questioned based on that cost principle are not expressly unallowable. That was before the Raytheon case however, where the ASBCA (Armed Services Board of Contract Appeals) ruled that costs must be specifically named and stated as unallowable in order for them to be considered expressly unallowable.

The new guidance pars the listing of expressly unallowable costs from 110 examples to 91 cost principles identifying expressly unallowable costs. It also updates the guidance so as to be consistent with the Raytheon case. It now reads:
In order for a cost to be expressly unallowable, the cost principle must state in direct terms that the costs are unallowable, or leaves little room for interpretation or differences of opinion as to whether the particular cost meets the allowability criteria. The Government must show that it was unreasonable, under all the circumstances, for a person in the contractor's position to conclude that the costs were allowable.
The updated guidance can be downloaded here.

Friday, May 17, 2019

DoD Recovers More Than $7 Billion from Procurement Fraud in a Five Year Period

The 2018 NDAA (National Defense Authorization Act) required the Defense Department to submit a report on defense contracting fraud for the previous five fiscal years (2013 through 2017). That report has not been published and shows some surprising results. We are all aware that there is significant fraud occurring in Government contracting and in DoD contracts in particular. We report on some of those on these pages from time to time. What we did not know was the magnitude of the occurrences and recoveries, until now.

The report, entitled "Report to Congress, Section 889 of the FY 2018 NDAA, Report of Defense Contracting Fraud was issued last December and reported the following:

  • During the five year reporting period, there were 1,059 cases resulting in a criminal conviction of 1,087 defendants. 678 of those were individuals while the remaining 409 were business entities. As a result of these convictions, a total of $369 million was recovered in fines and penalties, $370 million was recovered through restitution, and $53 million was recovered through forfeiture of property (total: $792 million).
  • Those recoveries, while impressive, pale in relation to recoveries from civil judgments and settlements. Over the same five year period, a total of $5.8 billion was recovered in civil judgments and settlements. Comprising these cases were 546 defendants (or respondents) of which 111 were individual persons and 435 were business entities.

Another interesting statistic coming from the report indicates that a handful of contractors are responsible for the majority of the fraud.  The total number of individuals or entities indicted for, settled charges of, been fine by any Federal department or agency for, or have been convicted of procurement fraud, involved 168 contractors with 16 million contract actions valued at $334 billion. Ninety-four percent of the 16 million contract actions was from a single contractor and 76 percent of the $334 billion was from two contractors.

Procurement fraud includes such things as cost and labor mischarging, defective pricing, price fixing, bid rigging, and defective and/or counterfeit parts.

Thursday, May 16, 2019

EPA Now Requires Contractors to Submit Invoices and Public Vouchers Electronically


The EPA (Environmental Protection Agency) has joined many other civilian agencies now in requiring its contractors to use the Treasury Department's Invoice Processing Platform (IPP) to submit invoices, public vouchers, and other payment requests. The IPP is a "secure" (insofar as anything can be secure) web-based service that manages Government invoices. Currently the EPA requires contractors and vendors to submit paper invoices, which are inefficient, costly, and outdated.

The requirement is found at EPAAR (EPA Acquisition Regulation a.k.a. the EPA FAR Supplement) 1552.232-70. Here's a few notes regarding the IPP.

  • Scanned documents are acceptable when they are part of a submission of a payment request. This would include the traditional SF 1034 and SF 1035 forms.
  • The contractor's government business point of contact as listed in SAM (System for Award Management) will receive enrollment instructions via email from the IPP. The contractor must register within 3 to 5 days or receipt of the email.
  • Waiver requests are available if the contracting officer determnes in writing that the IPP would be unduly burdensome for the contractor.
  • Invoices can be submitted more often than monthly if the contracting officer approves more frequent billing.

The new clause contains detailed instructions for preparing and submitting public vouchers under the new IPP system. One major difference between the IPP and the old paper system is that the IPP has no provision for suspending costs. Cost suspension occurs when the Government needs more information to support a particular cost before paying an invoice. It does retain the capability of disallowing costs which essentially serves the same purpose.


Wednesday, May 15, 2019

The "Order Limitation Clause"

FAR (Federal Acquisition Regulation) 52.216-19, Order Limitations, is found in solicitations and contracts when a definite-quantity contract, a requirements contract, or an indefinite-quantity contract is contemplated. The clause provides for minimum orders, maximum orders and procedures when the Government exceeds its maximum order limitation.

Concerning minimum orders, if the Government places an order less than the minimum order, the contractor is not obligated to furnish those supplies or services under the contract.

For maximum order, the contractor is not obligated to honor (i) any order for a single item in excess of (dollar figure or quantity), (ii) any order for a combination of items in excess of (dollar figure or quantity) or (iii) a series of orders from the same ordering office within a specified number of days that together call for quantities exceeding the limitation specified above.

Notwithstanding the maximum order limitation, contractors must honor any order exceeding the maximum order limitations  unless that order (or orders) is returned to the ordering office within a set number of days (usually three days) after issuance with written notice stating its intent not to ship the item called for and the reasons. At that point, the Government may acquire the supplies or services from another source.

In a recent Board case (Armed Services Board of Contract Appeals), WIT Associates files a claim with the Navy for additional costs related to orders that exceeded the maximum quantity specified in the Order Limitation clause, presumably because WIT incurred additional costs to honor the Navy's order.

The Board threw out the appeal, noting that WIT could have (and should have) denied the order within three days according to the contract terms - especially if honoring the order would cause it to incur costs it would not have otherwise incurred. There are a lot of reasons why a company might incur extra costs. Suppose the Government wanted some extra lawn-cutting services performed but to provide those extra services, required the contractor to incur overtime costs that were not factored into its contract price. Or suppose the Government's orders were for supplies that the contractor did not have in inventory and to meet the delivery date, the contractor was required to pay expedited fees to its vendor.

Remember, you don't have to honor orders in excess of the maximum quantities specified in the contract. You can and its often to your benefit but if the order(s) put you in a situation where you wold lose money, it might be better to return the order.



Tuesday, May 14, 2019

The Buy American Act of 2019

Companion Bills were introduced in the House and Senate this month to strengthen "Buy American" requirements. It is uncertain whether these bills which are likely to pass will result in increased buying of U.S. goods or whether its just more oversight on what is already happening.

The Act begins with a "Sense of Congress" as follows:
Every executive agency should maximize through terms and conditions of Federal financial assistance awards and Federal procurements, the use of goods, products, and materials produced in the United States and contracts for outsourced government service contracts to be performed by United States nationals. Every executive agency should scrupulously monitor, enforce, and comply with the Buy American Laws, to the extent they apply, and minimize the use of waivers. Every executive agency should implement processes to routinely audit its compliance with Buy American laws using data from the Federal Procurement Data System.
So what does this proposed legislation really accomplish? Lots of reporting, for one.

  • Annual reports from OMB (Office of Management and Budget) on compliance with Buy American laws including monitoring and enforcement
  • Listings of each waiver used and an assessment of the waivers' impact on domestic jobs and manufacturing
  • Annual reports from each executive agency on compliance with the Buy American Act.
  • Assessment of the impact that free trade agreements have on the Buy American Act.
  • A new website to include information on all waivers and exceptions to Buy American laws.
  • And a few more.

It seems to us that what this legislation intends to accomplish is to discourage or make it more difficult for procurement to waive the requirements of the various Buy American laws. There is no indication that such has been a significant problem historically so perhaps its just Congress trying to appease a constituency. The real problem it seems is that contractors who supply the Government are able to conceal the origin of their products - like the company that supplied baseball caps to the Marine Corps from China that should have been produced and acquired by domestic manufacturers. No waivers were granted in that case - the contractor simply sewed in "Made in USA" labels.

Monday, May 13, 2019

Is Your DSO Too High?

Days Sales Outstanding (DSO) is a metric that measures the average number of days it takes for accounts receivable to be collected. DSO can be calculated by dividing the total accounts receivable during a certain period (e.g. month, quarter, year) by the total credit sales multiplied by the number of days in the time period. Note, there are other more precise ways to calculate DSO but this one is the most widely-used. Best-Possible Days Sales Outstanding (BPDSO) is a related metric that measures what DSO should be if all credit customers paid exactly according to the terms of their invoice. So, for example, for a Government contractor with one cost-type contract, the Government should pay an "adequate" invoice within 30 days. The BPDSO in this case would be 30 days. If payment were received in 40 days, the DSO would be 40 days. The 10 day spread between DSO and BPDSO is where contractors should  be concerned.

The Government is usually pretty efficient in paying invoices (these days). Initiatives designed to assist small businesses has significantly reduced the time it takes for payment to be made - some reports as quickly as ten days. The Government however measures the time it takes to pay an invoice once an adequate invoice is received. And there is the rub. When an invoice does not match contract terms or omits certain required information and/or attachments, the invoice is rejected, payment is delayed and DSO increases. To correct a rejected invoice, involves hours of time from multiple departments to manually locate the missing information needed to "correct" the invoice - causing further inefficiencies within the company.

Some of you might be thinking, 30 days or 40 days, what's the big deal? Eventually we'll get paid. If that's your situation, congratulations. You are in a minority. Most contractors operate with lines of credit that come with interest payments. Adding 10 days over and over and over will result in increased interest payments that impact their bottom lines.  Run DSO metrics periodically and plot the trends. You might be surprised and you might find that a few changes to your billing system can bring down your DSO.


Friday, May 10, 2019

FAR Councils Propose to Broaden the Definition of "Commercial Item"

The FAR Councils have proposed a new rule, based on requirements of the 2018 NDAA (National Defense Authorization Act) that will expand the definition of "commercial items" appearing in FAR (Federal Acquisition Regulations) 2.101.

Under the proposed rule, NDI (non-developmental items) that are developed exclusively at private expanse and sold in substantial quantities to multiple foreign governments may be treated as commercial items.

Because commercial items, which include commercially available off-the-shelf items, are sold to the Government in the same way as NDIs, the Government can take advantage of the previous testing and general acceptance of the product in the commercial marketplace or by a state, local, or foreign government.

Here are some examples of NDIs that would be considered commercial items under the expanded definition:

  • Protective vests used by police departments and rescue equipment used by fire and rescue units
  • Defense products previously developed by defense agencies of U.S. allies and used exclusively for governmental purposes by Federal agencies, state or local governments, or a foreign government
  • Items that require only minor modifications to meet the requirements of the procuring agency; and
  • A mechanical dereefer (mechanism for releasing parachute reefing lines) used with the U.S. Army's cargo parachutes that was developed for and first used by the Canadian Army.

It is expected that the new expanded definition will achieve savings for both contractors and the Government. According to an analysis published by the Section 809 Panel, commercial item acquisitions are subject to up to 138 contract clauses, while acquisitions for NDIs that do not meet the commercial item definition as well as acquisitions for non-commercial items could be subject to nearly 500 clauses, depending on the principal type and purpose of the contract.

The full text of the proposed rule can be found here.

Thursday, May 9, 2019

Contractor Couldn't Deliver under $30 Million Contract - Update

This is an update to our post from December 7, 2017 wherein we described how FEMA (Federal Emergency Management Agency) awarded $30 million in contracts for tarps and plastic sheeting needed for recovery efforts after Hurricane Maria damaged large parts of Puerto Rico to a company who couldn't deliver. The contract was terminated for default and re-solicited but in the meantime, precious time was lost in the Puerto Rico recovery efforts (see Contractor Couldn't Deliver under $30 million Contract).

Seven U.S. Senators asked the DHS (Department of Homeland Security) Office of Inspector General to look into the matter - to determine whether FEMA followed procurement laws, regulations, and procedures when awarding these contracts to Bronze Star LLC, a newly-formed company operating out of a private residence in a Florida subdivision. The Inspector General issued it's findings and recommendations in a report yesterday whose title says it all: FEMA Should Not Have Awarded Two Contracts to Bronze Star LLC.

The OIG found that FEMA did not follow procurement laws, regulations, and procedures when awarding more than $30 million in contracts to Bronze Star for tarps and plastic sheeting. Specifically, FEMA

  • did not fully determine Bronze Star's or its supplier's compliance with the contract terms because it did not verify that Bronze Star could meet either contract's delivery schedule. It also did not perform steps necessary to determine whether Bronze Star's supplier could provide the necessary roof coverings withing contractually specified timelines;
  • Performed inaccurate technical reviews of the Bronze Star proposals;
  • used incorrect FAR clauses and did not reissue the original solicitations because FEMA personnel believed that a 5-hour response window for the tarp modification was sufficient, and the plastic sheeting solicitation had already closed; and
  • did not consult the Disaster Response Registry, as required, because it lacked guidance and procedures.

FEMA's failure to comply with procurement regulations delayed delivery of crucial supplies and impeded Puerto Rican residents' efforts to protect their homes and prevent further damage. Overall, FEMA wasted personnel resources, time, and taxpayer money by issuing, cancelling, and reissuing contracts for tarps.

The full OIG report that includes details on inadequate technical evaluations and the use of incorrect FAR clauses can be found here.



Wednesday, May 8, 2019

Cooperate with Government Investigations to Secure Reduction in Penalties

The Justice Department release new guidance to its FCA (False Claims Act) litigators which explains the manner in which the Department awards "credit" to defendants who cooperate with the Department during a FCA investigation. It includes a comprehensive list of the types of cooperation eligible for credit.

Justice wants to incentivize companies who voluntarily disclose misconduct and cooperate with its investigations. FCA defendants can merit a more favorable resolution by providing meaningful assistance to the Justice Department from voluntary disclosure (the most valuable form of cooperation) to various other efforts like sharing information gleaned from an internal investigation and taking remedial steps through enhanced compliance programs. Besides the formal voluntary disclosure program, the list includes"

  1. Identifying individuals substantially involved in or responsible for the misconduct.
  2. Disclosing relevant facts and identifying opportunities for Government to obtain evidence relevant to the Government's investigation that is not in the possession of the entity or individual or not otherwise known to the Government.
  3. Preserving, collecting, and disclosing relevant documents and information relating to their provenance beyond existing business practices or legal requirements.
  4. Identifying individuals who are aware of relevant information or conduct, including an entity's operations, policies and procedures.
  5. Making available for meetings, interviews, examinations or depositions an entity's officers and employees who possess relevant information
  6. Disclosing facts relevant to the Government's investigation gathered during the entity's independent investigation including attribution of facts to specific sources rather than a general narrative of facts, concerns, including rolling disclosures of relevant information.
  7. Providing facts relevant to potential misconduct by third-party entities and third-party individuals.
  8. Providing information in native format, and facilitating review and evaluation of that information if it requires special or proprietary technologies so that the information can be evaluated
  9. Admitting liability or accepting responsibility for the wrongdoing or relevant conduct.
  10. Assisting in the determination or recovery of the losses caused by the organization's misconduct.

Under the Justice Department's policy of "cooperation", the Department will take into account these kinds of activities in the form of a reduction in the damages multiplier and civil penalties.

Read more about the new or clarified policy here.


Tuesday, May 7, 2019

Defense Department to Increase Use of Quick-Closeout Procedures

FAR (Federal Acquisition Regulations) provide for quick closeout of contracts under certain circumstances. Delay's in closing out contracts is usually attributable to delays in finalizing indirect expense rates. To help reduce the backlog of cost reimbursement, time and material, labor hour, fixed-price incentive, and fixed-price re-determinable contracts, task orders, and delivery orders, the Government came up with quick-closeout procedures delineated in FAR 42.708. Briefly, quick-closeout procedures may be used if

  • The contracting officer and the contractor bilaterally agree to its use
  • DCAA (Defense Contract Audit Agency) is contacted and has no reason to recommend against quick closeout
  • The contract is physically complete and all services and commodities have been accepted, and
  • The amount of unsettled indirect cost to be allocated to the contract is relatively insignificant.

With respect to the "relatively insignificant" criteria, costs are insignificant when the total amount of unsettled direct and indirect cost to be allocated to any one contract does not exceed the lesser of $1 million or 10 percent of the total contract, task order or delivery order amount.

Under a new Class Deviation to FAR issued by the Defense Department (see Class Deviation - Quick-Closeout Procedures Threshold), the $1 million threshold is raised to $2 million and the 10 percent threshold is removed. The Class Deviation reads:
DCMA ACOs are further authorized to deviate from FAR 42.708(a)(2) (i.e. the $1 million or 10 percent threshold criteria) and negotiate settlement of direct and indirect costs for a specific contract, task order, or delivery order to be closed in advance of the determination of final direct costs and indirect rates ... regardless of the dollar value or percent of unsettled direct or indirect costs allocable to the contract.
Under this class deviation, there should be a much larger pool of contracts eligible for quick-closeout procedures. If you think you might have contracts that qualify, contact your ACO.


Monday, May 6, 2019

CORs Have a Role in Reviewing Incurred Cost

Typically, incurred cost audits and audits of interim requests for payment (i.e. voucher reviews) are performed by the contract auditor (DCAA or Defense Contract Audit Agency for DoD contracts) and reports are sent to the contracting officer for resolution if there are any findings noted.

There is another party that is often overlooked in the review process that is regularly called upon to render assistance in the audits. These are the COR's or Contracting Officer Representatives.

Contracting officer representatives (CORs) are individuals appointed by the contracting officer (CO) to assist in the technical monitoring or administration of a contract. Although CORs can be employed on any type of contract, they are more common in complex and long-term services, supply, and/or construction contracts. These are the on-site people charged with monitoring progress, performing inspections, correcting deficiencies among many other responsibilities. A COR does not have the authority to make any commitments or changes that affect price, quality, quantity, delivery, or other terms and conditions of the contracts.

A recent memorandum issued by the Under Secretary of Defense for Acquisition and Sustainment lists some additional responsibilities that CORs are to assume relating to review and approval of incurred costs. If you have a COR assigned to one or more of your contracts, you can expect the following procedures will be performed periodically to assist the auditors in their review process.

  1. Ensure that costs included on an invoice are consistent with the COR's records of monitoring contract performance. For example, if a contractor is claiming overtime and the COR 'knows' from his monitoring activities that overtime was not worked, such information should be elevated to the CO.
  2. Ensure that hours worked equal hours invoiced. This is probably not a precise calculation but one of general magnitude. If the COR knows that a contractor has 100 on-site, he/she would not expect to see a voucher with 5,000 hours for the month.
  3. Verify that materials and services required by the contract were in fact delivered and accepted by the Government. So, for example, if the contractor bills for 1,000 yards of ready-mix, there should be contemporaneous records to show that 1,000 yards of ready-mix were delivered to the job site.

Any information developed from these procedures are to be elevated to the CO and the contract auditor for further consideration and evaluation.

Friday, May 3, 2019

Army Civilian Employee Accepted Bribes in Exchange for Sensitive Procurement Information

REK Associates is a service-disabled veteran owned small business based in Williamsburg VA. It appears that the Company has a smattering of Government contractors and very little in the way of commercial work. It's website touts its expertise in range, construction and environmental projects.

Franklin Raby was an Army civilian range operations manager at Hawaii's Schofield Barracks until about a year ago. Yesterday, Mr. Raby pleaded guilty to accepting tens of thousands of dollars worth of bribes (somewhere between $40 and $95 thousand) from REK Associates, in exchange for providing the company with sensitive procurement information.

Bribes included a classic car (a 1969 Ford Galaxie), a hunting rifle, and diamond earrings. Mr Raby failed to disclose these bribes on his financial disclosure forms (duh).

According to court documents, Raby used his position of influence to assist REK Associates in receiving a Government contract by tailoring the contract's language so that the company had a better chance of winning the bid.

After leaving his Army job, Mr. Raby went on to work for REK Associates - probably as appreciation for all of the valuable service rendered to the company while an Army employee. He's probably no longer employed at REK either. His sentencing is scheduled for this coming August.

No word on how the crimes were uncovered.

Thursday, May 2, 2019

Expedited Closeout for Contracts Greater Than 17 Years

Nearly a year ago, the Defense Department proposed a change to its FAR Supplement (DFARS or DoD FAR Supplement) that would allow contracting officers to close out contracts (or groups of contracts( without completing a reconciliation audit or other corrective action under certain circumstances (see DoD FAR Proposed Regulation to Expedite Closeout of Old Contracts). Although published as a proposed change, it followed a class deviation to FAR 4.804-5(a)(3) which effectively implemented the new policy (see Special Closeout Authority for Old Contracts).

Earlier this week, the Defense Department published its final rule on the subject. This special closeout authority applies to contracts that were (i) entered into on a date that is at least 17 fiscal years before the current fiscal year, (ii) that have no further supplies or services due, and (iii) for which a determination has been made that the contract records are not otherwise reconcilable because the contract or related payment records have been destroyed or lost or, even if available, the time or effort required to establish the exact amount owed to the U.S. Government or amount owed to the contractor is disproportionate to the amount at issue.

To accomplish the closeout process, the new regulations authorize a contract or groups of contracts to be closed out through a negotiated settlement with the contractor and the remaining contract balances to be offset with balances within the contract or on other contracts regardless of the year or type of appropriation obligated to fund each contract or contract line item, and regardless of whether the appropriation has been closed.  This is a very desirable feature to the new policy. We know from our own experiences in assisting Government contractors through the contract closing process what a nightmarish task it can sometimes be to correlate incurred costs to contract line items to specific appropriation.

One of the comments on the proposed rule included a recommendation to define "disproportionate" as it is used to compare the time it takes to accurately close out a contract versus the amount owed the contractor. The DFARS Council didn't add a definition. It stated that the term was used to establish that DoD's estimate of time and effort are determined to be greater than the amount owed to a level of imbalance. DoD stated that it is not its intent to identify a threshold, but to leave the determination of disproportion to the contracting officer's discretion.

The text of the new rule is available here.

Wednesday, May 1, 2019

Offerors' Failure to Furnish Data Requested by the Contracting Officer

Before awarding any contract, contracting officers must make an affirmative statement that the contract price is fair and reasonable. When competition exists, price reasonableness can usually be established without requiring any additional supporting data. However, for sole source acquisitions, contracting officers must obtain the data necessary to establish price reasonableness. For contracting actions subject to TINA (Truth in Negotiations Act), the requirement to furnish certified cost or pricing data serves this purpose. However, for actions not subject to TINA, contractors may be requested to prepare and submit additional data to support their proposed prices.

Before the Government requests additional data from a prospective contractor, it must fir obtain whatever data is available from Government or other secondary sources and use that data in determining a fair and reasonable price. If that information is insufficient to determine fair and reasonable pricing, the contracting officer will require submission of data other than certified cost or pricing data from the offeror to the extent necessary to determine fair and reasonable pricing. This data might be that from which the Government can perform a cost realism analysis or information related to prior sales.

When a contractor fails to comply with a contracting officer's request for data other than certified cost or pricing data to support a fair and reasonable price determination, the contractor becomes ineligible for award. From a contractor's perspective, being declared ineligible for award is not a good thing, and frankly, this probably doesn't happen very often. What does happen however is that the Government often 'overreaches' in its request for information to include requests for data that has nothing to do with establishing fair and reasonable pricing. If this happens, it is appropriate to ask the contracting officer how he/she intends to use the information to establish fair and reasonable pricing. Perhaps the request was poorly worded or a 'cut-and-paste' job from a prior request without any though given to the propriety of the request to the current situation. Most often, concerns about whether requested data is appropriate in the circumstances for the purposes intended can be resolved quickly.




Tuesday, April 30, 2019

Performance Based Payments - Proposal to Remove Limitation to Cost Incurred


The Defense Department is proposing changes to its rules on Performance-Based Payments. These changes are required to implement provisions in prior NDAAs (National Defense Authorization Act).

Performance-based payments are a method of contract financing that are based on the achievement of objective, quantifiably measurable events, results, or accomplishments that are defined and valued in the contract prior to performance. It is the preferred method of contracting as many believe that it reduces oversight and compliance costs to the Government. It also has benefits for contractors as it should help cash flow, reduce the cost of oversight and compliance, and allow management to focus on technical and schedule progress.

One of the inherent problems with performance based payments however has been that performance based payments are limited to amounts not greater than costs incurred up to the time of payments. This restriction then requires contractors to accumulate costs in such a way that such comparisons can be made. It kind of defeats some of the attractions of performance-based payments.

Under the proposed rule, those restrictions will be lifted. Contractors will no longer be limited by their costs incurred. Contractors will be able to bill based on the milestones stipulated in the contract.

The requirement for contractors to report costs incurred when requesting performance-based payments is retained, not for purposes of capping payment requests, but in order to have the data necessary for negotiation of performance-based payments on future contracts. So, contractors will still require a cost accounting system hat accumulates costs by contract.

You can access the full text of the proposed change, including instructions on where to send comments here.

Monday, April 29, 2019

Be Prepared to Justify Your Capital Expenditures

Government contractors, like any business, have a responsibility to maintain their competitiveness and increase productivity by making capital investments. There might be a few contractors out there without significant capital investments in facilities, machinery, and equipment - like companies providing staff augmentation services - but most companies need to invest or they quickly find themselves at a competitive disadvantage.

Contract auditors are always interested in capital investment decisions and the process for budgeting capital improvements because expenditure for capital improvements turn in to depreciation expense which are charged to Government contracts. The auditors' concern is not so much with need for contractors to investment in capital projects but that the decision on what to invest in will somehow work to the Government's detriment.

Auditors will be looking to see that there are tangible benefits accruing to the Government from capital expenditures. They will examine cost-benefit aspects to see which investments produce cost benefits equal to the original cash outlay over the shortest time frame. If the investment is necessary for non-financial reasons, the auditor will be looking for improved qualify, mobilization capability, or enhanced competitiveness.

Contractor decisions in this regard are affected by a myriad of factors, some of which may not result in the most equitable treatment of Government work. For example,due to limitations on funds available for capital investments, the contractor might be required to choose between purchasing a piece of equipment for a commercial division or for a division working primarily on Government cost reimbursement type contracts. The contractor will undoubtedly attempt to produce increased profits and cash flow. Since the contractor will continue to recover its incurred costs in the Government division, it may be less inclined to increase the efficiency of that division. Thus priorities will be audited carefully.

To avoid audit related issues arising from capital expenditure decisions, budgeting, and implementation, it is important to have written procedures. It seems like we always begin recommendations with a need for written procedures but having (and following) written procedures is a basic internal control function. Such procedures should provide for the following:

  • a well-defined organization with established decision authority and responsibility for pursuing capital investment opportunities which will improve the efficiency of operations, affect long-term economies, and make timely identification and replacement of deteriorated and obsolete items.
  • a systematic approach for auditing processes, organizations and methods affecting improvements and detecting deteriorated, obsolete, and underutilized items.
  • a standard procedure for identification of potential capital budgeting projects, estimation of project benefits and costs, evaluation of proposed projects and development of the capital expenditure budget based on project acceptance criteria
  • a documented review and approval process which assures that the assumptions are correct, all relevant factors have been considered, and proposals are consistent with organization objectives
  • a systematic follow-up to insure that project implementation is prompt and withing estimated costs
  • a system for tracking and comparing planned to actual benefits.


Friday, April 26, 2019

Full Disclosure of Disciplinary Actions Required by CPA Firms Engaged in Government Auditing


Last month, the Defense Department issued a "Class Deviation" that affects contractors performing contract audits for the Department. Contracting officers are now required to use a new clause (described later) when contracting with accounting firms providing financial statement auditing or audit remediation services to the Defense Department in support of audits. Or, in other words, incurred cost audits that were once the sole bailiwick of DCAA (Defense Contract Audit Agency).

Section 1006 of the 2019 National Defense Authorization Act (NDAA) requires that any accounting firm providing financial statement auditing or audit remediation services to the Defense Department in support of audits required under 31 USC 3521 (i.e. incurred cost audits) to provide DoD with a statement setting forth the details of any disciplinary proceedings with respect to the accounting firm or its associated persons before any entity with the authority to enforce compliance with rules or laws applying to audit services offered by the accounting firm.

Most likely, disciplinary proceedings contemplated in this provision would include those administered by individual State Board's of Accountancy in the states where firms are licensed. In California, for example, the State Board of Accountancy's quarterly newsletter details disciplinary actions taken during the quarter. There were about 40 actions listed in that newsletter. A lot of these disciplinary actions resulted from acts discreditable to the profession and resulted in suspension, revocation of licenses, fines, and remedial training.

The Government has a vested interest in ensuring that its contractors, including those that provide professional audit services, adhere to the highest ethical, moral, and professional standards. What is not clear is whether this disclosure requirement applies to on-going or interim review status or whether it applies when the case is closed/finalized. The class deviation also ensures confidentiality if the contractor so-desires.

Thursday, April 25, 2019

DoD's Annual FOIA Report

Each year the Defense Department prepares an annual report on its Freedom of Information Act (FOIA) activities. As its name implies, the 'Act' requires full (or partial) disclosure of previously unreleased information and documents controlled by the Government. There are nine exemptions to what must be disclosed including:

  • classified information (obviously)
  • related to internal personnel rules and practices
  • prohibited from disclosure by another federal law
  • trade secrets and other confidential business information (can't get your competitors bid information)
  • inter agency communications protected by attorney work product or attorney client privilege
  • matters of personal privacy
  • compiled for law enforcement purposes that meet certain conditions (endanger a case or a life)
  • information relating to the supervision of financial institutions
  • geological information concerning wells (that's a weird one)

In Fiscal Year 2018, the Defense Department processed more than 54 thousand FOIA requests. Of those 54 thousand requests, only five percent or 2,652 requests were denied based on one of the foregoing exemptions. An additional 15,801 requests were partially granted and partially denied based on the statutory exemptions.

Looking at the data more granular, DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Audit Agency) processed 103 and 210 cases respectively. For DCAA, about half the cases were closed as having no data responsive to the request. Four requests were denied based on one of the exemptions (probably involving contractor proprietary data) and four other requests were denied because the source of the records sought belonged to another Agency.

For DCMA, 28 of its 210 requests were withdrawn while another 84 requests were denied because the information requested was not an Agency record. DCMA made no 'full' denials but did make 43 partial denials.

The ASBCA (Armed Services Board of Contract Appeals) received 21 requests. One was withdrawn, 15 were denied as having no 'responsive' records, and the remaining five were eight granted in full or in part.

More than half (26,415) of all FOIA requests were to the Army. The Navy was a distant second (10,025) followed by DLA (5,266), and the Air Force (4,216).

You can read the full Annual FOIA report here.

Wednesday, April 24, 2019

Illegally Obtained Contracts Results in Prison Time for Company Executive

This guy didn't just "rent-a-vet" to illegally win construction contracts set aside for disabled veterans. He also "rented" a minority and "rented" a woman to obtain contracts set aside for minority-owned and women-owned business respectively. Over a ten year period, Tomas Brock (and his company, Boykin Contracting), won more than $160 million in Government contracts to which he was not entitled. Programs set aside for minorities, women, and service veterans are intended to provide small businesses with an opportunity for growth and experience.

How was this guy caught? The discovery was a little different than what we're used to seeing. According to the Justice Department's press release, Mr. Brock's scheme fell apart when he fraudulently acquired loans to cover the company's losses and fell behind on the repayments, prompting a civil lawsuit and then, a criminal investigation. Why did the company lose money and why did the company need to borrow money? The same press release states that Mr. Brock siphoned off money from the company to support a "lavish lifestyle".

The investigation took five years and involved many investigative agencies. Mr. Brock was sentenced to five years in prison.

Tuesday, April 23, 2019

Perhaps Its Time to Examine Your Contract Portfolio Mix

The California Assembly has introduced legislation that would restrict the State and localities from entering into contracts with companies that work with Federal immigration agencies. The Bill, known as AB 1332, would specifically prohibit a state or local agency from entering into a new, amended, or extended contract or agreement with any person or entity that provides a federal immigration agency with any data broker, extreme vetting, or detention facilities services.

There's a few new definitions here that need to be examined; data broker, detention facility, extreme vetting, and Federal immigration agency.

A data broker means the collection of information, including personal information about consumers, from a wide variety of sources for the purposes of reselling that information to their customers, which include both private sector businesses and government agencies. This definition also includes the aggregation of data that was collected for another purpose different from that for which it is ultimately used. This seems like a very broad definition that would include Google and a host of other web-based data mining companies.

Detention facilities means any private party that provides transportation, identification, processing, security, maintenance, or other operational support to a private or public facility intended or actually used for immigration detention purposes..

Extreme vetting means data mining, threat modeling, predictive risk analysis, or other similar service.

Federal immigration agency means any department, subdivision, agency, or agent of the United States government that provides immigration-related services, including, but not limited to, Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), Health and Human Services Office of Refugee Resettlement, and the Department of Homeland Security (DHS).

For purposes of determining which person or entity provides a federal immigration agency with data broker, extreme vetting, or detention facilities services, the state or local agency shall consider all of the following:

  • information published by reliable sources
  • information released by public agencies
  • a declaration under the penalty of perjury executed by the person or entity, affirming that they do not provide data broker, extreme vetting, or detention facilities services to a federal immigration agency
  • \information submitted to the state or local agency by any member of the public, and thereafter duly verified.

Wonder how far this law will get? Wonder what the consequences will be if it is passed into law?

The full text of the proposed legislation can be found here.



Monday, April 22, 2019

$1.6 Million Settlement for Violations of the Service Contract Act

In yet another settlement involving failure to pay minimum wages - this one larger than other recent announcements - the Labor Department's Wage and Hour Division (WHD) announced that a California company agreed to pay $1.6 million in back wages and benefits.

This settlement was also unique in that the company, McKesson Specialty Distribution contacted WHD to self-report the infraction. WHD investigated and confirmed that McKesson failed to pay required prevailing wage rates to employees performing wok on a federal service contract. This meant that the company also failed to pay the correct overtime rates and the correct fringe benefits.

The Services Contracting Act (SCA) requires contractors and subcontractors performing services on prime contracts in excess of $2,500 to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in the locality, or the rates, including prospective increases, contained in a predecessor contractor's collective bargaining agreement.

The Labor Department lauded McKesson for coming forward and self-reporting the violations and encouraged all employers to review their pay practices and to contact the WHD for compliance assistance.

You can read more about this case here.